Disclaimer

The results here are provided for general informational purposes, as a convenience to the readers. The materials are not a substitute for obtaining professional advice from a qualified person, firm or corporation.

Preface

With the market's direction becoming tenuous, we can explore option trading opportunities in Pennsylvania Real Estate Investment Trust (NYSE:PEI) that do not rely on stock direction.Over both the most recent bull market and the last bear market from 2007-2008, for stocks with certain tendencies, there has been a shrewd approach to trading pre-earnings volatility with options.

The goal is to find trades that expose risk in short-bursts of time, with out-sized historical gains relative to historical losses.

The Trade Before Earnings in Pennsylvania Real Estate Investment Trust
Let's examine the results of getting long a weekly at the money straddle 4-calendar days days before earnings, and then sell out of that position one-day before the actual release earnings.

Here is the setup:

We are testing opening the position 4 calendar days pre-earnings event and then closing the straddle 1 day before earnings. This is not making any earnings bet. This is not making any stock direction bet.

Once we apply that simple rule to our back-test, we run it on an at-the-money straddle:

Returns
If we did this long at-the-money (also called '50-delta') straddle (using the options closest to one-week in expiration) in Pennsylvania Real Estate Investment Trust (NYSE:PEI) over the last three-years but only held it before earnings we get these results:

Track this trade idea. Get alerted for ticker `PEI` 4 days before earnings

The results show a 125.2% return, testing this over the last 11 earnings dates in Pennsylvania Real Estate Investment Trust. That's a total of just 33 days (3 days for each earnings date, over 11 earnings dates). That's an annualized rate of 1,384.8%.

We can also see that this strategy hasn't been a winner all the time, rather it has won 7 times and lost 4 times, for a 64% win-rate and again, that 125.2% return in less than two-full months of trading.

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Setting Expectations

While this strategy has an overall return of 125.2%, the trade details keep us in bounds with expectations:
➡ The average percent return per trade was 20.96%.

Option Trading in the Last Year
We can also look at the last year of earnings releases and examine the results:

PEILong At-the-Money Straddle

% Wins:

75.00%

Wins:
3

Losses:
1

% Return:

173.0%

% Annualized:

3,157.3%

In the latest year this pre-earnings option trade has 3 wins and lost 1 times and returned 173.0%.
➡ Over just the last year, the average percent return per trade was 41.51%.

Tested Across Bull and Bear Markets
While many times we can identify strategies that work during a bull or a bear market, this strategy, when we tested it empirically, worked during both. Here are the specifics:

Using the Nasdaq 100 and the Dow 30 as our study group, here are the average total returns by stock for the bull market from 2012-2018 (January) and 2007-2009, which includes the bear market, and the wild 2009 -- where the S&P 500 bottomed in March and then ripped higher -- in other words, a highly volatile time in the market.

As a quick reminder, here is the 2007-2009 period for the S&P 500:

Time Period

Return by Stock

2012-2018 (January)

+40%

2007-2009

+21%

Since we are looking at total returns, it turns out those time periods show nearly identical results (2012-2018 was six-years and 2007-2009 was three-years). Yet more impressive, the strategy showed a 57% win rate by stock during the wildly volatile 2007-2009 market.

These results are empirical, which is to say, they are objective. We are not inserting opinion.

WHAT HAPPENED

This is it -- this is how people profit from the option market -- finding trading opportunities that avoid earnings risk and work equally well during a bull or bear market.

Please note that the executions and other statistics in this article are hypothetical, and do not reflect the impact, if any, of certain market factors such as liquidity and slippage.

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